Update: Silvercorp Metals' Earnings - My First Call Was Too Early But I'm Bullish Once More

Summary

Silvercorp Metals reported Q1 2015 net income of $2.7 million or $0.02 per share compared to $4.6 million, or $0.03 per share in the comparable 2013 quarter.

Much like its competitors Silvercorp Metals has been hit by the lower price of silver of the last year and a half.

Due to cost control measures margins improved to 51% from 44% last quarter as production costs declined 33% year-over-year.

My buy recommendation was too early but I am bullish once more as Silvercorp has improved operations drastically and is well prepared to benefit from eventual rises in metal prices.

Silvercorp Metals (NYSE:SVM) just reported its first quarter 2015 earnings. It was a decent quarter to my surprise, as this company was thought to continue to struggle by many of my colleagues. With silver prices leveling and in my estimation having risk to the upside, things may be beginning to improve. So how was the quarter? Well overall net income was $2.7 million or $0.02 per share compared to $4.6 million, or $0.03 per share in the comparable 2013 quarter. Much like its largest competitors, including Silver Wheaton (NYSE:SLW) as I outlined here, Silvercorp Metals has been hit by the price of silver. But Silvercorp Metals did have improved production cost controls. In the quarter, these controls led to profit margins of 51% compared to 44% in the comparable 2013 quarter. Further, the company saw administrative spending drop by 36% compared to last year. This was all good news. However, unlike Silver Wheaton, which had more attributable silver production in its last quarter, Silvercorp Metals saw lower metal production. In fact silver, lead and zinc production decreased 18%, 14%, and 67% respectively.

When I last opined on Silvercorp Metals as a dividend paying stock in the silver space, the stock was trading at $4.93. This was before the massive sell-off in gold and silver, and now the stock trades at just $1.90, or a loss of 61%. With the stock now stabilizing along with silver prices, I think now is the time to do some buying. I was just too early, and did not anticipate the surreal sell-off in metals prices. The company's present earnings however have me bullish on the name once again. Although silver prices are still depressed, the company has restructured itself and has gotten costs under control. It is well prepared for an upside move in silver. For example production costs were $15.0 million compared to $22.5 million Q1 2014, a reduction of 33.3%. To be fair, some of this reduction stemmed from less ore being processed. But the margin expansion is a highlight. 51%, up from 44%. That is huge. Now that silver is stabilizing, I do not think that we will see reduced cash flows in coming quarters. In fact, this could be one of the last sequential declines we see year-over-year, as silver prices have been on the mend. In the present quarter, cash flows from operations were $13.8 million or $0.08 per share, compared to $17.7 million, or $0.10 per share, in Q1 Fiscal 2014.

So what now? If you had bought in on my last recommendation, chances are you bailed out after a loss. If not, I would NOT sell here. The stock is up 20% off its lows. The company has tightened up. It is still producing substantially though the company produced 1.1 million ounces of silver, 3,461 ounces of gold, 11.5 million pounds of lead in the quarter. Further, the quality is improving. Metal production in this quarter was positively impacted by improved dilution control, which caused a 14% and 23% increase in silver and lead head grades, respectively. The bottom line is this. I was far too early in my buy call. I still like the company long-term, but as a miner, it desperately needs silver prices to come up. Unlike Silver Wheaton, which given its business model will make money even when silver prices are low (they do face margin compression on low silver prices), miners do not have the luxury of low production costs. But Silvercorp is getting them under control as evidenced in this quarter, which beat analysts' estimates. Over the long term, they will rise in my estimation given that inflation is bound to pick up, and the company will continue to pay its dividend. As silver rises, margins and earnings will rise as will the dividend and share prices. I think the company is in much better shape now than it was when I originally opined, and am comfortable recommending a buy at these levels. I was just too early before.

Disclosure: The author is long SLW. (More...)The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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